Locally, there are no major releases scheduled for the week ahead.
On the corporate actions front, Tuesday marks the last day to trade British American Tobacco, Netcare, Famous Brands, Alexander Forbes, Sirius Real Estate and Stor-Age Property shares, to receive their most recently declared dividends. Sirius Real Estate will also be hosting its Annual General Meeting (AGM).
In the US, corporate releases remain limited, with investors now preparing for a new season of earnings. The S&P 500 is expected to deliver an earnings growth rate of ~4.3% during this period. Some of the big names printing results this coming week include Ford Motor Company and Costco Wholesale Corporation.
Ford will release sales numbers for the three-month period ended 30 June 2022. According to Bloomberg forecasts, adjusted earnings are expected to climb over 230% y/y to $0.43, and revenue is set to increase 30.5% to $34.9 billion, with lower inventory volumes being largely offset by firmer pricing. This has allowed margins to remain wide amid a sustained recovery from a weaker first quarter. Looking ahead, all eyes are on the company’s electric vehicle (EV) offering, with F-150 Lightning pick-up truck deliveries expected to top 160 000 units in less than four years, the first high-volume commitment to the EV space by a legacy automobile manufacturer, with General Motors and Tesla not expected to offer any sort of competition before 2023.
Costco will also release sales figures for 2Q22. The company is set to report adjusted earnings and revenue growth of 7.9% and 12.8% respectively, as it continues its recovery to a more typical trading environment underpinned by strong customer demand for food, electronics and household essentials. Input and inventory costs are expected to remain elevated throughout the year, while spending on discretionary goods may become more volatile as consumers stick to essentials. However, Costco has proven to be resilient, with same-store sales growth and a solid e-commerce offering supportive of long-term growth.
In Europe, results are expected from Repsol, among a few others.
Repsol is a multinational energy and petrochemical company based in Spain. Through various subsidiaries, the company is involved in the exploration and production of crude oil and natural gas, as well as the transportation of petroleum and liquified petroleum gas (LPG). In terms of financial performance, the company is set to report solid earnings and revenue growth for the second quarter. As per a Bloomberg intelligence report, increased refining margins and higher utilisation rates should continue to support the company’s profitability throughout the year, leaving excess cash for increased shareholder returns.
In the Asia-Pacific, Samsung will publish 2Q22 results next week:
According to Bloomberg, adjusted earnings for the electronics giant are set to increase 5.4% y/y to $1.31, while revenue will increase 4.8% y/y to $59.5 billion. Operating profit for the memory-chip division witnessed sequential growth due to a slight increase in supply of both DRAM and NAND. However, sales of mobile phones and display panels have dropped due to seasonally lower demand. The outlook for the year remains positive though due to the company’s strong competitive advantages.
Economics Weekly: Youth employment is more critical as economies transition
The latest Stats SA’s Quarterly Labour Force Survey (QLFS) shows that the country’s official unemployment rate remains stubbornly high at around 34.5% and has persistently risen from around 23.2% in 1Q08. Worryingly, it is the youth (individuals aged 15-34 years old) that are disproportionately affected by the unbearably high levels of unemployment. The official unemployment rate for young people aged 15-24 stood at 63.9% in 1Q22, coming from 46.3% at the start of 2008. Meanwhile, the unemployment rate for the age group 25-34 years was at 42.1%, relative to 26.3% at the start of 2008. The unemployment rate for those older than 35 years, on the other end, is below the average official unemployment rate of 34.5%.
South Africa (SA) is estimated to have about 4 680 321 unemployed and 10 863 215 not economically active young people.
Combined, this amounts to 15 543 536 young people not receiving any form of labour income to support their livelihoods. This is more than the 14 914 207 officially employed individuals of various age groups. With only 37.2% of the working-age population (15-64 years) employed, the dependency rate is high. The employed individuals, and government, confront the social pressure to support the vast majority of the unemployed and the economically inactive.
Looking at the demographic characteristics of the country’s labour force, particularly the youth, the data notably shows that unemployment levels are disproportionately skewed towards those without a higher (tertiary) level of education. A similar picture emerges when looking at the not economically active individuals.
Concerningly, higher levels of youth unemployment continue even though the government has taken several initiatives (even if temporary and cyclical) to address it. The persistent nature of local unemployment implies that targeted long-term policy actions are long overdue. These may include measures to upskill the youth for current and, more crucially, future jobs and industry requirements, especially as economies rapidly embrace digitisation and transition towards zero-carbon emissions by 2050. In this regard, the Treasury’s growth strategy paper already emphasises improving educational outcomes and ensuring alignment between learning outcomes and labour market needs. This is critical, as economies are not static but dynamic and therefore the education system must also respond to these changing needs of labour markets.
As labour markets transform through automation, digitisation, globalisation and remote working, it is crucial to recognise that young people will increasingly need skills and experience for jobs of the future, not the past. In this regard, education and training institutions should focus on producing young, skilled individuals that will thrive in automation. Most nations, including Australia, the United States, the United Kingdom, Japan, Canada, Singapore, Germany, France, and Finland, are focusing on policies that, among others, boost digital literacy through a new computing curriculum and ensure access to digital infrastructure across Economics schools and communities at a foundational level. This ensures the placing of enterprise skills (i.e., problem-solving, creativity and social intelligence) at the heart of learning, and driving entrepreneurship that is focused on promoting employment and innovation.
Through these policy interventions, economies, including SA, may realise their goals of creating large-scale youth employment opportunities. In the interim, supporting the growth of labour-intensive sectors such as agriculture, tourism and hospitality may go a long way in creating jobs for the majority of the less-skilled youth. Critically, this will require, among other things, improving the deteriorating infrastructure for critical network industries and ensuring reliable water and electricity supply. The ongoing load shedding is concerning in an economy where the employment level is 1.5 million below the pre-pandemic level. In addition, the informal economy contributes about 19% of total employment in SA. This implies that policy interventions should also support the informal economy to broaden youth employment opportunities. The cost of failing to create future employment opportunities for the youth will be the lost human potential and possibly socio-economic instability.
Week in review
Employment in the formal non-agricultural sectors of the economy, as shown by the Quarterly Employment Survey, continued improving in 1Q22. Employment increased by 42 000 jobs or 0.4% q/q on gains in the community services, manufacturing and mining sectors. Meanwhile, losses were recorded in trade, construction, business services and transport. Relative to a year ago, employment is higher by 195 000 jobs or 2.0%. Nevertheless, the recovery in employment is incomplete, with employment still lower by 127 000 or 1.2% compared to 1Q19 and by 207 000 or 2.0% compared to 1Q20. While both full-time and part-time employment increased, part-time employment grew much stronger by 41 000 or 3.5% q/q and gained 192 000 jobs or 18.6% y/y. Total gross earnings slowed in 1Q22 by 3.4% q/q.
However, earnings are still 7.6% higher than a year ago, 7.7% higher than 1Q20 and have firmly surpassed 1Q19 levels by 14.2%. Prevailing geopolitical tensions and the related rise in global inflation are expected to slow the momentum in global growth, which poses a risk to domestic output. In addition, the KwaZulu-Natal (KZN) floods and electricity shortages are likely to exacerbate the impact on local growth and impede employment prospects. In line with this, the recovery of the labour market to pre-pandemic levels may still be protracted in the near-term. Beyond this, further progress on structural reform and more robust growth in private sector investment should support employment growth. The growth in nominal compensation could be supported by higher wage adjustments amid elevated inflation but real incomes in some industries are likely to be constrained.
The Consumer Confidence Index (CCI) deteriorated to -25 index points in 2Q22, from -13 index points in 1Q22. The latest reading reflects the lowest sentiment level in 30 years, except the -33 index points reading during 2Q20 when the pandemic hit and level 5 lockdown was implemented. While real consumer spending increased by 3.2% y/y in 1Q22 and high-frequency data shows robust retail sales, consumer sentiment suggests a slowdown in the near future. Consumers remained pessimistic about the appropriateness of the present time to buy durable goods, with this sub-index recording -32 points from -28 previously. Consumer expectations about their household finances over the next 12 months turned negative, recording -5 points in the latest survey, from 8 points previously. Expectations of the economy’s performance also worsened, to -39 points from -18 points previously. This likely reflects the impact of current geopolitical tensions and elevated fuel prices. Higher living costs, risks of slower global growth and recent bouts of loadshedding should dampen domestic economic prospects and weigh on confidence and spending.
The FNB/BER civil confidence indicator remained weak at 10 index points in 2Q22, from 9 index points in 1Q22. This indicates that 90% of respondents are dissatisfied with prevailing business conditions. Underpinning the low confidence was poorer construction activity. Stats SA data showed that real investment in construction works was -10.0% y/y in 1Q22, down from -9.3% y/y in 4Q21. This quarter’s survey results point to somewhat worse developments in 2Q22. Despite the plans and policies touted by the government aimed at bolstering infrastructure spending, activity remains weak.
As a result of this, tendering competition for the work that is available has intensified and consequently, contractors’ profit margins have come under renewed pressure as firms try to remain competitive. Going forward, activity is set to remain weak given the thin order books as well as pronounced delays in project adjudication and awards.
Private sector credit extension (PSCE) decelerated from 5.9% y/y in April, to 5.3% in May. The slower growth in PSCE in May was due to lower uptake from the corporate sector, which decelerated from 5.5% y/y to 4.5% in May. Household credit, on the other hand, accelerated marginally to 6.4% y/y, from to 6.3% y/y in April, with support coming from both the secured and unsecured credit components. Notably, vehicle finance continued a robust performance, registering growth of 8.6% y/y in May, unchanged from the previous month. This still represents the fastest growth since August 2014, nearly eight years ago. Housing finance also remains strong, registering 6.7% y/y, unchanged from the previous month. In the unsecured credit components, support largely came from the uptake of credit cards, accelerating from 3.8% y/y in April to 4.3% y/y in May.
Producer inflation for final manufactured goods jumped to a new record high of 14.7% y/y in May from 13.1% y/y in the prior month. This was still on the back of coke and petroleum-related products (31.7% y/y contributing 7.7ppt), food (12.3% y/y contributing 2.0ppt), as well as metals and machinery product price pressures (15.9% y/y contributing 2.3ppt). At 12.3% y/y, producer food inflation had reached a similar inflation rate recorded in the 2H16 when the economy was faced with devastating drought conditions. During that period, producer food inflation peaked at 13.5% in August 2016. It is unclear whether current producer food inflation is at or near a peak.
Nevertheless, steep producer food inflation has dire implications for consumers as food prices at retail stores are also rising. The latest consumer food inflation measured 7.8% y/y. Supply chain pressures and the war in Ukraine are still impacting producer prices. The intermediate producer inflation remained steep at 15.6% y/y in May, albeit reflecting a moderation from 17.6% y/y in the previous month (and 23.1% y/y in November 2021). However, intermediate producer prices increased by 2.1% m/m after increasing by 1.7% m/m, reflecting the persistent supply chain pressures. This is also reflected by the SARB’s Composite Supply Chain Pressure Index, which remained elevated in May.
After narrowing to R16.0 billion in April (from R47.2 billion in March), the nominal trade surplus (not seasonally adjusted) widened to R28.3 billion in May. This reflected a robust 17.8% m/m growth in export values while imports grew by 10.9% m/m. The monthly trade rebound likely reflected the clearing of some bottlenecks at the ports following the disruptive impact of flooding. Exports amounted to R179.46 billion while imports amounted to R151.11 billion. Notably, imports grew stronger by 38.8% y/y while exports posted growth of 9.9% y/y. YTD (January to May) imports have increased by 28.9% compared to the corresponding period last year, while exports have increased by 8.0%. The recent relapse in commodity prices and concerns over a material global growth slowdown as well as domestic production constraints could limit export growth going forward.
Week ahead
Data on SA’s foreign exchange reserves for June will be published on Thursday.
South Africa’s gross foreign reserves amounted to $59.26 billion in May, down from $60.28 billion in April. The decline in gross foreign reserves was driven by the fall in the dollar- denominated gold price as well as payments made on behalf of government.
Partially offsetting these was valuation adjustments and matured foreign exchange swaps that were conducted for sterilisation purposes.
Data on electricity generated and available for distribution for May will also be published on Thursday. Electricity production (not seasonally adjusted) declined by 3.7% y/y in April, after declining by 1.1% y/y in March and by 0.4% y/y in February.
Seasonally adjusted electricity production decreased by 1.0% m/m, after showing no change in the previous month and 1.3% m/m growth in January. Consumption declined by 2.0% y/y and 0.4% m/m. A higher incidence of load-shedding should have implications for these indicators in the second quarter of this year and likely extending into 2H22.
